1. Market Response Modeling
Response Modeling Basics

2. Response Models Aggregate response models Individual response models
Shared-experience models
Qualitative response models

3. The Concept of a Response Model
Idea:
Selling effort
Advertising spending
Promotional spending
Marketing Inputs:
Market
Marketing Outputs:
Sales
Share
Profit
Awareness, etc.

4. Input-Output Model Marketing Actions Inputs Observed Market Outputs
Competitive Actions
(2)
Product design
Price
Advertising
Selling effort
etc.
Market
Response
Model
Awareness level
Preference level
Sales Level
(1)
(4)
(3)
Environmental
Conditions
Control Adaption
(6)
Evaluation
(5)
Objectives

5. Response Function Sales Response Effort Level Max Response Function
Current
Sales
Min
Current
Effort
Effort Level

6. A Simple Model } b (slope of the } Y (Sales Level) X (Advertising)
sales line) a
(sales level when
advertising = 0) } 1
X (Advertising)

8. Phenomena P1: Through Origin P2: Linear Y Y X X
P3: Decreasing Returns (concave)
P4: Saturation Q — Y Y X X

9. Phenomena P5: Increasing Returns (convex) P6: S-shape Y Y X X
P7: Threshold
P8: Super-saturation Y Y X X

10. Aggregate Response Models: Linear Model
Y = a + bX
Linear/through origin
Saturation and threshold (in ranges)

11. Aggregate Response Models: Fractional Root Model
Y = a + bXc
c can be interpreted as elasticity when a = 0.
Linear, increasing or decreasing returns (depends on c).

12. Aggregate Response Models: Exponential Model
Y = aebx; x > 0
Increasing or decreasing returns (depends on b).

13. Aggregate Response Models: Modified Exponential Model
Y = a (1 – e–bx) + c
Decreasing returns and saturation.
Widely used in marketing.

14. Aggregate Response Models: Adbudg FunctionXc
d + Xc
Y = b + (a–b)
S-shaped and concave; saturation effect.
Widely used.
Amenable to judgmental calibration.

15. Aggregate Response Models: Multiple Instruments
Additive model for handling multiple marketing instruments
Y = af (X1) + bg (X2)
Easy to estimate using linear regression.

16. Aggregate Response Models: Multiple Instruments cont’d
Multiplicative model for handling multiple marketing instruments
Y = aXb Xc
b and c are elasticities.
Widely used in marketing.
Can be estimated by linear regression.
1 2

17. Dynamic Effects 1. Marketing Effort e.g., sales promotion
Spending Level
Time

18. Dynamic Effects
2. Conventional “delayed response” and “customer holdout” effects
Sales Response
Time

19. Dynamic Effects
3. “Hysteresis” effect
Sales Response
Time

20. Dynamic Effects
4. “New trier” “wear out” effect
Sales Response
Time

21. Dynamic Effects
5. “Stocking” effect
Sales Response
Time

22. Aggregate Response Models: Dynamics
Dynamic response model
Yt = a0 + a1 Xt + l Yt–1
Easy to estimate.
carry-over effect
current effect

23. Aggregate Response Models: Market Share
Market share (attraction) models Ai
Mi = ––––––––––––––––––
A1 + A An
Ai = attractiveness of brand i.
Satisfies sum (market shares sum to 1.0) and range constraints (brand share is between 0.0 and 1.0)
Has “proportional draw” property.

24. Individual-Level Response Models: Requirements
Satisfies sum and range constraints.
Is consistent with the “random utility” model.
Has the “proportional draw” property.
Widely used in marketing.

25. Individual-Level Response Models MNL
Multinomial logit model to represent “probability of choice.” The individual’s probability of choosing brand 1 is:
eA1
Pi1 = ––––
å eAj j
where Aj = å wk bijk k

26. Logit Model Implications . . .
High
Marginal Impact of a Marketing Action
Low
0.0
0.5
1.0
Probability of Choosing the Alternative

27. Attribute Ratings per Store
Parking Store Variety Quality for Money Value
4 (new)
Importance Weight

28. Shares per Store (a) (b) (c) (d) (e)
Share Share estimate estimate without with Draw Store Ai = wk bjk eiA new store new store (c)–(d)
New

29. Objectives Profit (= Sales ´ Margin – Costs) Sales ROI Market share
Maximization over time
Dealing with uncertainty
Multiple goals
Multiple points of view
Others ??

30. Shared Experience Models
Base the response model on behavior observed at other leading firms:
Advisor model
PIMS model

31. Qualitative Response Models
Rules to capture qualitative response:
The retailer will accept the trade deal, but what he does with it is based on coop advertising dollars. If the deal includes coop money, the retailer will accept the deal and pass on all of the discount to the consumer. If the discount is greater than 30 percent, he will put up a big display. Otherwise, the retailer leaves the item at regular price and does not use an ad feature or a display.
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